Diversity and Hype in Commercial Drone Market Forecasts

Have you noticed the growing number of market forecasts for the commercial drones industry? I have. Not a week goes by that a new one doesn’t hit my radar. I’m currently tracking about 15

[41 as of 6/27/2016]. Each in one way or another delivers growth projections for the drone or unmanned aerial system (UAS) sector that are nothing short of phenomenal. But are they, really?

In this post, I’m going to share three secrets to help you understand forecasts better, unpack the hype and diversity of market reports, and hopefully leave you skilled enough to ‘cry foul’ when you see a new report that is, well, questionable. At the end, I’ll give you my personal take on the most popular forecast reports.

THREE SECRETS

All forecasts are wrong

No one argues that forecasts and market projections are a critical part of business planning, management, and strategy. However, the first thing you learn as a forecaster (I was one) is that forecasts are always wrong – it’s just a matter of how wrong. You also learn that the further out in time you forecast (1 year vs. 10 years), the greater the error. And while that might sound gloomy, it is reality, and if you are looking to start or invest in a commercial drone business and you are relying on these forecasts, you should recognize an important trap.

Proper forecasts are created by taking actuals (historical unit sales, purchases, revenue, etc.) and projecting forward in time some kind of trend – either flat, up, or down. Statisticians know that the more historical data you have the greater likelihood your projection will be accurate. But what happens when there is no history to go by? Such is the case with the commercial drones market. It’s a nascent industry, and we have little to no historical data. So here’s the trap. Forecasters have to either borrow historical data from a similar industry or size a market potential with a proxy.

But sometimes the proxy is wrong. Such is the case with the Association of Unmanned Vehicle Systems International (AUVSI) The Economic Impact of Unmanned Aircraft Systems Integration in the United States. It has become the most repeated forecast for the commercial drone market, garnering media attention typically reserved for celebrity weddings and babies born to royalty. Its bottom line forecast is that the UAS market will reach a whopping $82 billion in the 10 years after the FAA issues favorable regulations and that the precision agriculture market will “dwarf all others.” But as we’ve dissected in Five Reasons the AUVSI Got Its Drone Market Forecast Wrong (and subsequently here and here) the proxy, the methodology, and the conclusion is wrong – very wrong.

That’s sad — and a big disservice to the community. Venture investors have a huge variety of questions about the commercial drone market, but two questions stand out in terms of their importance. The first is: What is hype and what is reality? The second is: Is this market really a big, high-growth, high-margin market? If you rely solely upon media hype and AUVSI, your answer would be an unequivocal Yes. The commercial drone market is the biggest, highest growth, best new market opportunity to come along in decades (or maybe centuries…). Really?!

Regulations raise uncertainty

In some markets, traditional forecasting methods just don’t work. Such is the case with the regulated markets. Commercial drones are and will continue to operate in a regulated market – regulated not in the sense that governments are setting price floors or ceilings, but rules that allow or disallow certain commercial activities – like what airspace you can operate in and whether you can operate beyond visual line of sight (BVLOS). (For more on the BVLOS issue see article here.)

Even so, the global drone industry has not sat back waiting for government policy to be hammered out before pouring investment and effort into new ventures. The latest data from CB Insights shows drone startup funding is hitting new highs. Firms have raised more in 2015 than the last three years combined.

The problem is many of those funded vendors are beginning to invest in drone technology (like BVLOS automation) which may take years to be legal. Additionally, some investment is in consumer drone manufacturers that may want to aggressively target specific commercial sectors through acquisitions, internal development, partnerships, and second-tier investment but do so without regard to an actual intended commercial product and/or application. It looks good in a headline, but the devil really is in the detail, as I have noted in FAA Proposed Drone Rules: Market Opportunity Winners and Losers.

Some segments are indistinct

With the advancement of model aircraft and camera technology, it’s not easy to distinguish between a consumer drone and a commercial drone. For example, low-cost camera drones like the DJI Phantom 2 Vision+ and 3DR IRIS+ are sold as consumer products, but marketed to and purchased by professionals who use them for commercial purposes like aerial photography, film making, and videography. Add to this trend the growing number of vendors like Pix4D that provide integrated software specifically for mapping and modeling, and now you have surveyors and geographic information system (GIS) professionals using them in their practices.

So what’s the buyer of a market forecast to do? The report says “commercial” but how can they distinguish the size of the particular market you intend to service or invest in if so many drones are sold for hobby but then used for business? Sorry, I don’t have a happy answer for you. It’s virtually impossible in every case to delineate the difference between the consumer and commercial drones market. If you want to come close a rational number, then you are going to have dissect the numbers yourself and make assumptions about your market based on things like gating factors that drive adoption rates, competing technology, and the price elasticity of incumbent providers. You can factor aircraft sales, but I wouldn’t use it as the base for a market forecast.

THE ROUNDUP

Here’s my take on the most popular forecasts. Note that several of these are sold by resellers.

BI Intelligence – has a 32-page report for subscribers (~$400) that forecasts total cumulative drone spending over the next 10 years (2015 to year-end 2024) of $111 billion. It also forecasts that $15 billion of that will be spent on commercial/civilian applications, including R&D costs, software, and hardware. But looking into the numbers it basically recycles AUVSI’s bogus numbers and then ups the Teal Group’s already inflated (and out of touch) forecast.

ABI research – has a research report available to subscribers that says the small UAS market will surpass $8.4 billion by 2018 and by 2019 the commercial sector will dominate the overall small UAS market with revenues exceeding $5.1 billion, roughly five times larger than the prosumer/hobby market, and 2.3 times greater than the military/civil market segment. I respect the work of this firm, but as you can see from the graph in this article they consider prosumer as part of hobby and not commercial as would be relevant. Still, I agree with Dan Kara: “The money to be made is actually in the application space to a large degree.” So why don’t they forecast that as a segment of commercial?

Markets and Markets – sells a 180+ page report on the commercial drones market by type, technology, application, and geography for $4,560. They expect the global market for small UAS to reach $1.9 billion by the end of 2020. They state the obvious and say the increase in civil and military applications remains the driving factor for the global small UAV market. They go on to say that among all the key applications (law enforcement, energy and power, manufacturing, infrastructure, media and entertainment, agriculture, and scientific research) law enforcement will hold the largest market share at ~25%. My research says the opposite it true – at least in the U.S. That’s because adoption by local and state police agencies here already is and will continue to be fraught with controversy over privacy and Fourth Amendment rights.

Idate Research – sells a $2,300 54 page report with a forecast covering 2014 to 2020 for commercial and consumer drones. They predict that once a suitable regulatory framework is introduced and no significant disruption takes place, nearly 170,000 commercial drones will be operating across the globe by the end of 2020, alongside about 12 million hobby drones. It’s hard to tell how they arrive at these numbers since their methodology is primarily qualitative, e.g., obtained from one-on-one interviews and not quantitative or established by cross-referencing public sources and external databases.

Lux Research – has a report available to subscribers that says the commercial UAV market will grow to $1.7 billion by 2025 but will be held back by regulations. It also says that agriculture tops applications and will generate $350 million in revenues in 2025, led by uses in precision agriculture. It envisions utilities to be the second biggest segment at $269 million, and oil and gas third at $247 million. Right off the bat you can discount their numbers since it’s been established over and over that agriculture will not lead the market. Clearly they have not researched thoroughly this or other markets like GIS. Also, their overall number is quite low. DJI is projected to sell above $1 billion in consumer drones in 2015. Given the market tendency for these to be used commercially you can see their 2025 number is not rational.

FINAL THOUGHTS

As you can see there is a wide disparity of assumptions and time horizons – which is why I didn’t create a comparison table. And you can see some of these reports are quite expensive. Will you get an ROI from them? Perhaps. But in some cases the best advice may be that of Will Rogers: “The quickest way to double your money is to fold it in half and put it in your back pocket.”

I would to hear your thoughts on these market forecasts. Send me your comments or write us colin@droneanalyst.com.

21 Comments

Hadj
June 4, 2015 at 9:59 PM

Very candid, sober, and agnostic deciphering of the industry.

This is not my first reading of your articles. I enjoy your writing style and feel that truthful and transparent assessments are positive for ALL those who support this industry; whether those immediate conclusions are seen in an optimistic light or not.

Secret No. 2 is so important to realize regarding predicting growth.
Regulation creates uncertainty, of that at least you can be certain! That’s why we are investing in Australia which has far and away the most mature RPAS regs. We already have two RPAS licenses. Training and compliance will have to be paid for whatever other factors come into play. Andrew.

I agree with your assessments on each of the reports, especially that it’s impossible to distinguish between consumer/commercial in many of the forecasts, and that Agriculture won’t lead the way. An accurate assessment needs to roll up the forecast according to each industry. Perhaps a job for Drone Analyst? Thanks for the excellent summary, it’s nice to see all the reports compared within 1 post.

Colin Snow
June 9, 2015 at 4:25 PM

You’re welcome and thanks for your comments Nate. That is exactly how I would do a forecast.

Colin Snow
June 12, 2015 at 9:26 AM

Via email:

I think you are spot on with your article. As an ag service company, we paid very close attention to the AUVSI Economic Impact report and the huge numbers they were throwing out, especially the ones for the ag industry. Over the last three years, we have learned that UAVs may be a quick way to grab images, but when considering man hours flying, processing, and the logistics of getting everything done; UAV imagery is not a cheap option. Commercial agriculture covers a majority of this country and trying to fly over that area at 400’ and within a line of sight is not an economical or efficient way of getting that data collected. As you mentioned in your article, regulations may keep this industry at bay because of the costs associated with operating within their guidelines.

There seems to be a misconception out there that the ag industry is a huge pot of gold just waiting to be taken advantage of. I’m not sure why that is. Farmers and Ranchers have as little control over their market as any other business owner. They have no control over weather, pests, and numerous other factors that affect their yield at the end of the year. Along with that, they have no control over what the commodity markets are going to be like when it comes time to harvest their crops. Because of these variables, farmers and ranchers try to mitigate risk as much as possible. This is why in season multispectral data is such an important tool for farmers.

UAVs and the high resolution data, that they can provide, have their place in ag, but it is not the answer that people want it to be at this time. The reason for that is the cost and the inability of machinery to manage on a one inch level. The high resolution data that comes from a UAV actually has to be saturated for it to actually be used for a variable rate application in a field. Ag machinery technology cannot manage at this level. Our normal practice for an average field of 120 acres would be to have between 3 and 5 zones with none of them being less than 1 acre. These zones are the areas where we would apply our different rates of inputs. We are having to saturate 5 meter Rapid Eye imagery for the same reason. Because of this and the exponentially greater cost of UAV imagery, we use the cheapest option as possible, which is typically satellite imagery. Until the value matches the cost and is exponentially greater than that of the UAV imagery we will continue using the cheaper option.

The technology in UAVs and the processing of images is increasing at a supersonic pace. We continue to monitor companies like DroneDeploy to see where the industry is going and how we can leverage it for our business. The future will be interesting, but as far as forecasting that future, you might was well say it’s cloudy with a chance of meatballs.

I enjoyed your article. Thanks for bringing some perspective to the table.

[…] crazy forecasts included in these firms’ business models (like the ones I’ve referenced in Diversity and Hype in Commercial Drone Market Forecasts). In 2016, we may not see a “crash and burn,” but keep your eye out for a quiet “right […]

[…] crazy forecasts included in these firms’ business models (like the ones I’ve referenced in Diversity and Hype in Commercial Drone Market Forecasts). In 2016, we may not see a “crash and burn,” but keep your eye out for a quiet “right […]

So much of the research for these papers concentrate on the funding for R & D, hardware and software. We, however, are in the service industry charting our various UAVs with operators to end users. There’s no numbers on the growth forecasts in this sector.

[…] crazy forecasts included in these firms’ business models (like the ones I’ve referenced in Diversity and Hype in Commercial Drone Market Forecasts). In 2016, we may not see a “crash and burn,” but keep your eye out for a quiet “right […]

I know this article is older, but I would love to see these forecast talk about the growth in the commercial drone sector. I know they are currently very helpful in real estate photography, etc, but it would be nice to know if experts believed they are here to stay or will be regulated to such a degree as to not be practical.

Colin Snow
February 8, 2017 at 12:29 PM

Thanks for you question Charles. FAA Part 107 spells out the regulation for visual line of sight operations and describes when waivers are required. The concern many have (me included) is that state and local regulations are being put in place without regard to federal preemption that make it difficult for commercial service providers to operate without impunity. The FAA regulations are here to stay. It may take some time for the state and local regulations to fall in line with them – Colin

[…] many experts to be justifiably skeptical or outright dismissive of these forecasts. As Colin Snow explained in great detail, the research in such forecasts can’t rely on historical data and often uses invalid proxy info, […]

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